Chapter 7 vs Chapter 11: Which Bankruptcy Chapter Will Actually Help You?

Filing for bankruptcy in the U.S. typically means choosing between Chapter 7 liquidation and Chapter 11 reorganization. Chapter 7 is faster, less expensive, and erases most unsecured debts within months, but it may require surrendering non-exempt property and leaves a 10-year credit mark. Chapter 11 is costlier and longer, often years, but lets businesses (and some high-debt individuals) keep operating while restructuring obligations. The best choice depends on income, debt type, and long-term financial goals.

• Chapter 7 (Liquidation): Filing fee $338; attorney costs $1,000–$2,500; most unsecured debts discharged in 4–6 months; non-exempt assets may be sold; remains on credit for 10 years.
• Chapter 11 (Reorganization): Filing fee $1,738 plus trustee fees; attorney costs $10,000–$50,000+; cases last 1–5 years; debts restructured, operations continue; also stays on credit for 10 years.
• Eligibility: Chapter 7 requires passing a Means Test using DOJ income standards; Chapter 11 is typically used by businesses or individuals exceeding Chapter 13 debt caps.
• Success Rates: ~70% of Chapter 11 filers with plans confirm reorganization; Subchapter V improves small business survival rates by >20 percentage points.
• Key Trade-off: Chapter 7 offers speed and discharge, while Chapter 11 preserves operations but with higher cost and oversight. Always consult a qualified bankruptcy attorney before filing.

Bankruptcy is one of the most consequential financial decisions an individual or business can face. It offers the potential for a fresh start, but it also carries long-term implications for creditworthiness, personal assets, and business survival. In the United States, two of the most common forms are Chapter 7 (liquidation) and Chapter 11 (reorganization). While both exist under the federal bankruptcy code, they differ sharply in purpose, eligibility, cost, and outcomes. Understanding these differences in depth is critical before making a decision.

What Is Chapter 7 Bankruptcy?

Chapter 7, often referred to as “liquidation bankruptcy,” is primarily designed for individuals but is also available to small businesses. Under this process, a court-appointed trustee gathers and sells a debtor’s non-exempt assets to repay creditors. In most cases, however, debtors retain essential items such as a primary residence (within certain state exemption limits), personal vehicles, and tools needed for work.

The end goal is debt discharge: once the case is finalized, most unsecured debts, including credit cards, personal loans, and medical bills, are erased. Certain debts, however, survive bankruptcy, such as student loans (with rare exceptions), child support obligations, and certain tax liabilities.

Eligibility and Means Testing

The cornerstone of Chapter 7 eligibility is the Means Test, created to prevent abuse of the system. This test compares the debtor’s household income against their state’s median. If income exceeds the median, allowable expenses like housing, transportation, and healthcare are subtracted to determine disposable income. Too much remaining income may disqualify the filer, forcing them to consider Chapter 13 or Chapter 11 instead. Official Department of Justice means testing data is published regularly and used by courts to make these determinations.

Costs, Timeline, and Practical Considerations

Filing for Chapter 7 bankruptcy requires a $338 court filing fee (as of 2025), though courts may allow installment payments or grant fee waivers for low-income filers. Attorney fees typically range between $1,000 and $2,500, depending on the case’s complexity and jurisdiction.

Most cases, especially “no-asset” cases where there is nothing to liquidate, conclude within four to six months. More complex cases involving the sale of nonexempt property may take longer.

The major advantage of Chapter 7 is speed and discharge,  filers often receive relief within months. The main drawback is the risk of losing nonexempt property, although many states have generous exemption rules that protect essentials like a home, car, or tools of trade. Another lasting consequence is credit impact: a Chapter 7 filing can lower credit scores significantly and remains on the filer’s credit report for up to 10 years.

What Is Chapter 11 Bankruptcy?

Chapter 11 is a more complex tool, largely designed for businesses that want to continue operating while restructuring their debts. Unlike Chapter 7, which liquidates assets, Chapter 11 allows companies to renegotiate obligations under court supervision, keeping the doors open while devising a plan for creditors.

Who Can File?

Businesses: Corporations, partnerships, and sole proprietorships are the primary users of Chapter 11.

High-debt individuals: Individuals may also file for Chapter 11, particularly when their debts exceed Chapter 13’s strict limits.

As of April 1, 2025, those limits are:

• Unsecured debt: $526,700

• Secured debt: $1,580,125

Costs, Timeline, and Challenges

The costs of Chapter 11 bankruptcy are much higher than Chapter 7. The filing and administrative fee totals $1,738. Debtors must also pay quarterly U.S. Trustee fees, ranging from $250 to over $30,000 depending on disbursements. Attorney fees typically range from $10,000–$50,000 in mid-sized cases and can climb into the hundreds of thousands in large corporate reorganizations.

For businesses, Chapter 11 offers the critical advantage of continuity, employees keep their jobs, operations continue, and contracts can be renegotiated. However, nearly every major financial decision must be approved by the bankruptcy court, which adds both expense and delay.

Chapter 7 vs. Chapter 11: A Detailed Comparison

Asset Retention and Outcomes

A central difference lies in asset treatment. In Chapter 7, non-exempt assets are liquidated by the trustee, although many individuals keep their homes, vehicles, and retirement accounts due to exemption laws. In Chapter 11, by contrast, businesses usually retain their operating assets, enabling them to continue generating revenue while restructuring.

Timelines and Success Rates

Most Chapter 7 bankruptcy cases close in under six months, making it the fastest path to debt relief. By contrast, Chapter 11 bankruptcies can extend for years, as reorganization plans must be negotiated, amended, and court-approved.

Research shows that about 70% of Chapter 11 cases where plans are proposed succeed in confirming a reorganization plan, while the remainder are dismissed or converted to Chapter 7. Almost half of unsuccessful cases are dismissed within six months, and roughly 80% within a year.

The creation of Subchapter V of Chapter 11 for small businesses has improved outcomes significantly. Studies find plan confirmation rates of 50–55% under Subchapter V, compared with only ~25–31% in traditional small-business Chapter 11. Conversion and dismissal rates are also lower, with median time to confirmation around 6.5 months, versus ~10.5 months in non-Subchapter V cases. Recent research also finds that Subchapter V increases the likelihood of firm survival after bankruptcy by more than 20 percentage points in certain liability ranges.

Credit Impact

Both Chapter 7 and Chapter 11 remain on credit reports for up to ten years, but creditors may view them differently. Chapter 7 signals total liquidation and inability to repay, which can be seen as more severe. Chapter 11, on the other hand, reflects an attempt at reorganization and repayment, which may be considered a more responsible approach by lenders.

Real-World Case Studies

• Chapter 7 Example: In re Krohn (2001). The Sixth Circuit denied Chapter 7 relief after finding the debtor had sufficient disposable income, demonstrating how the Means Test prevents abuse of the system.

• Chapter 11 Example: In re Johns-Manville Corp. (1982). Facing massive asbestos-related liabilities, Johns-Manville used Chapter 11 to restructure and continue operations. The case became a landmark in showing how Chapter 11 can preserve businesses despite overwhelming debt.

Choosing the Right Path

The choice between Chapter 7 and Chapter 11 is deeply personal and situational:

• Chapter 7 is often the best option for individuals with limited income, significant unsecured debts, and few valuable assets to protect.

• Chapter 11 is better suited for businesses that want to preserve operations, or for individuals with debts that exceed Chapter 13’s thresholds.

Because both processes carry serious risks, from asset loss to years of court oversight, it is critical to consult a qualified bankruptcy attorney. Legal experts can assess eligibility, examine state exemption rules, and forecast long-term outcomes.

Bottom Line

Chapter 7 delivers quick relief by wiping out unsecured debts, but often at the cost of non-exempt property and a significant credit scar. Chapter 11, while more expensive and drawn-out, gives businesses and some individuals a chance to restructure and continue operating. Both paths remain powerful tools within the U.S. bankruptcy system, but their suitability depends on income, debt structure, and long-term financial goals. Making an informed decision requires not only understanding the legal framework but also carefully weighing the personal and financial trade-offs.

Related: This article is part of Mooloo’s Loans & Credit Hub, covering credit scores, loans, mortgages, credit cards, and smart borrowing decisions: